Clarity Affects the Bottom Line

Last week I spent a morning leading a management team through a strategic positioning session to achieve more clarity about their business. The next day I read an article containing this quote by the leader of a technology incubator:

My team and I probably saw, heard or read more than 200 business pitches last year. And after about 75 percent of them, we didn’t understand the businesses. I’m convinced that this is a primary cause of entrepreneurial failure. Every entrepreneur needs to be able to clearly and succinctly communicate the essence of his or her business to an intelligent stranger.

While it’s important for startups to have an elevator pitch, it’s equally important for the management team of an existing business to share a clear vision that provides a context for making business decisions. The lack of this understanding is so common among $10-50M companies that I’ve stopped being surprised when they can’t articulate a clear positioning statement. Why do you think so many companies have trouble with something so basic and so important? I have a theory.

Recently a CEO friend in Dallas shared the “PerformanceManagement” matrix below. While the origin is unclear, it’s a useful framework for examining issues, and it offers a clue as to why so many companies lack the clarity they need to operate efficiently.

Urgent Important Matrix

For many CEOs, sustaining an up-to-date picture of the company’s value in the market is either neglected or delegated to Marketing because it lacks urgency compared to operation issues and cost management. This falls under the heading of “Poor Planning.” The CEO’s number one priority is growing shareholder value, and clear strategic thinking contributes directly by enhancing the quality of important decisions affecting future value.

If you’re a CEO, do you stay on top of your company’s value in the eyes of players that matter, especially potential acquirers? Or will you leave this non-urgent critical issue unaddressed until the day you’re shocked to read that your closest competitor was just acquired by a company with whom they’d partnered?

Restart with the End in Mind

Chances are you’ve heard Stephen Covey’s Habit #2 in his classic self-help book called Seven Habits of Highly Effective People: “Begin with the end in mind.” Or said another way by the author of the Peter Principle, “If you don’t know where you’re going, you probably will end up somewhere else.”

When a business is launched, founders typically have a clear end in mind. A successful company survives the first couple of years and finds its way to profitability or at least breaks even. Then a critical point is encountered where the CEO’s focus on “where we’re going” can devolve into a focus on “staying alive.”

An early 20/20 Outlook post tagged the resulting condition as “The CEO Dilemma.” The CEO lets the pressure to fix operational issues and manage cash flow dictate a daily routine of addressing those needs and neglecting his/her responsibility to relentlessly consider how to grow shareholder value.  Working in instead of on the business becomes a comfortable norm.

If this sounds familiar, realize that you can hit the RESET button by employing the 20/20 Outlook process. Understand how simply saying “if I build a great business, I don’t need to worry about my exit strategy” can keep you from leading the pack among acquisition candidates in your market space.

Instead “restart with the end in mind” by considering the sources that contribute to the value of your company’s product and service offerings. Drill into how relationships with potential acquirers and potential acquisitions can unlock and grow that value. And create and implement a rational plan to align your company with other organizations that can help your business reach its full potential and move into a leadership position.

I’m On a Mission!

In Bob Dylan’s song “Gotta Serve Somebody” he points out that, no matter who we are, we all have to make significant choices:

You’re gonna have to serve somebody
Well, it may be the devil or it may be the Lord
But you’re gonna have to serve somebody

The implication is clear for our spiritual life, but the broader principle applies in our work life. At the core of what drives us are competing priorities, and the one at the top will be the “decider” most of the time. What is the top driver in your work life?

What drives me personally is a passion for building effective business partnerships. Over the years, I’ve seen great ones lift companies to new levels of value and effectiveness. Much more often, I’ve seen poorly planned ones consume significant resources with little or nothing to show for the effort.

Three principles characterize the most effective partnership strategies – context, planning, and execution:

Context means understanding your own organization and its offerings in relation to the market they live in. What kind of company are we? What value do we deliver? Whom do we compete against? How are we unique? A simple positioning project can bring great clarity of thinking and purpose, yet it’s amazing how unclear the answers to these questions often are.  If you don’t understand your own company, don’t expect success in partnering with others.

Planning partnerships is imperative. Stephen Covey’s second habit “Begin with the end in mind” is based on ancient wisdom from Aristotle that’s often ignored. Once armed with a clear understanding of your market positioning, you’re ready to think about partnering and what you want to accomplish. What is your vision for growing the value of your company? If you clearly understand where you’re going, business partnerships will help you get there faster.

Execution of partnerships requires effort and resources. Why expend time and effort in creating a business relationship only to let it die from lack of care? A partnership needs focus in order to produce expected benefits. Increasing the odds of success requires architecting self-sustaining elements into the partnership from the beginning, and that can only be done successfully through clarity of purpose and a clear vision for growth.

Anonymous, my all-time favorite writer, said it best:

“Action without Vision just passes time.”

Exit Strategy Update 04/22/2010

WSJ: Tech Firms Bulk Up With Debt
“The decision to take on debt breaks from tradition in tech, where companies have typically preferred to raise money by selling stock. Debt has become a more attractive fundraising option largely because interest rates are low. The shift comes as mergers and acquisitions are reshaping the industry, with a handful of tech giants that have huge cash hoards—such as Cisco Systems Inc. and Hewlett-Packard Co.—snapping up firms. Now smaller tech companies are hoping that adding debt will allow them to get in the buying game.”

Virtual Intelligence Briefing: AOL dumps $850M Bebo acquisition – Why big M&A rarely works
“Don’t pay product valuations for feature companies – It is a good strategy to acquire small companies to gain super star employees, cool new features, and access to new market segments. But, the acquiring company needs the discipline to only pay a valuation commensurate with a “feature” not a “product”. Don’t add lots of valuation for synergies that probably won’t happen, or for revenue streams that may not materialize.”

WSJ: Eating Into Apple’s Cash Pile
“With a market cap of around five times book, Apple could choose to use its stock for large-scale acquisitions. But as its market value is around $220 billion, this would need to be a very large-scale acquisition indeed. To give some perspective—and not to propose these companies as targets—U.S. software giant Oracle Corp. has a market cap of around $130 billion, while European leader SAP AG is valued around $60 billion.”

MercuryNews: Palmisano Needs ‘Bold Strokes’ to Sustain IBM Growth
“Under Palmisano, IBM has spent $25 billion buying companies. Compare that with at least $42 billion for Oracle and Hewlett-Packard’s $45 billion. IBM’s share price had risen 31 percent in the Palmisano era, versus 53 percent for Oracle and 165 percent for Hewlett-Packard.”

Optimal Board Conversations

Based on feedback from experienced CEOs, getting the optimal value from boards of directors is a common challenge. Of course, it starts with picking solid board members. As serial CEO Bill Bock said recently, “Building a strong board is every bit as important as building a strong management team.” He recommends at a minimum that you include at least one very strong financial mind and at least one “crusty operational type” on your board to provide balanced guidance to the management team. “The ideal director sees a bigger world than the CEO.”

Assuming that you already have the right people, deriving value from them is up to you, the CEO. You have to engage their best thinking while keeping in mind that they don’t manage daily operations – you do. Giving too much or too little control to the board can decrease its value.

By focusing on growing the value of the company, the 20/20 Outlook process provides a constructive framework for discussions at the appropriate level. Another serial CEO, Mike Shultz, describes 20/20 Outlook as “a methodology that is clear and focused on developing the strategies to fulfill Job One for the CEO and in the process, creates a framework for solid communications with the Board of Directors about their most important measurement of success.” Job One, of course, is increasing shareholder value.

The diagram below depicts the continuum of choices a CEO has for achieving value from his/her board of directors:

Board Balance

Two common problematic relationships with boards can develop: micromanagers and cheerleaders . A CEO may allow the board to have too much control and encourage micromanagement. Since board members often have CEO and operational experience, they can be easily tempted to fill any perceived vacuum in leadership that you display as CEO. While reviewing financial and operational performance is valuable and appropriate, constrain the resulting conversation to high level suggestions for improvement rather than drilling into the nuts and bolts of daily operations. (If a particular board member has directly applicable experience, engage that person offline and don’t occupy the entire board’s time.)

On the other hand, a CEO who over-controls the board wastes everyone’s time. Having a board full of cheerleaders that rubber-stamps decisions and flatters the CEO may feel good, but it defeats the purpose of having directors and prevents their having an impact on the value of the business.

Either extreme implies weakness. The CEO who allows the board to micromanage may lack confidence in his/her ability to lead, while the CEO who totally controls the board may incapable of handling constructive criticism. Optimally you want to engage the board in strategic conversations about increasing shareholder value.

Are you having optimal conversations with your board?


When Should You Partner?

Given that we’ve answered the “why partner” question, now let’s think about the “when to partner” question. Marketplace issues, whether threats or opportunities, commonly drive partnership decisions. For each issue, consider three factors that determine your desire and ability to grow through partnering:

  • Timing: What is the timing associated with this threat or opportunity? Is it immediate or long-term?
  • Potential Impact: What is the potential impact of some threat or opportunity that is currently presenting itself? Is it high or low?
  • Ability to Respond: What is my current ability to respond? Is it strong or weak?

As far as the Timing factor goes, if an issue, i.e. a threat or an opportunity, is not immediate, set it aside. Maybe someday you’ll find time to worry about that one!

For each immediate issue, determine whether it can have a relatively high or low impact and how strong is your ability to respond. Here’s a diagram depicting these points, followed by a brief description of each one:

Partnerships When

High threat/opportunity, strong ability to respond (“Pursue Aggressively”)
This issue is too pressing to postpone, and your company has the resources needed to address it aggressively through product enhancement and new product creation.

Low threat/opportunity, strong ability to respond (“Quick Hits”)
When you spot a weakness in a competitor’s ability to respond to such an issue, attack by leveraging your strength in this area.

Low threat/opportunity, weak ability to respond (“Prepare to Respond”)
These are usually “who cares” issues now that may grow into high impact issues later, so keep an eye on them while doing little to address them.

High threat/opportunity, high ability to respond (“Create Partnerships”)
If you can’t adequately respond to a pressing threat or opportunity, a partnership is the right answer. A partnership can be a precursor to an acquisition.

If I’m right and I’ve communicated clearly, you have a better understanding of why and when to form a business relationship. These are practical business concepts that will ensure your efforts are directed at the best opportunities to achieve the desired outcome for your business – a business that knows where it’s going!

So Why Partner at All?

Developing a partnership strategy is a critical concern for any company. Key to its formulation is an understanding of why partnerships make sense and under what circumstances they should be pursued. Understanding the context for developing a partnership strategy clarifies the decisions that need to be made.

So why partner at all?

“Whether it sells computers, clothing, or cars, your firm’s fate is increasingly linked to that of many other firms, all of which must collaborate effectively in order for each to thrive…                                          more than ever before, success depends on managing assets your company doesn’t own.”            (from The Keystone Advantage by Marco Iansiti and Roy Levien)

While this is universally true, it’s especially the case in immature and fragmented markets where no one company can possibly own all the pieces of a solution. Customers face a bewildering array of possibilities and choices. Gaining their attention and commitment is not as simple as relating your value proposition. You’re not just selling against direct competitors – you’re usually competing for a piece of a finite budget, and the customer can choose to invest in another area while declining to buy anything from you or your competitors.

By understanding the broader space in which you compete and by knowing how your company fits within that broad context, you’re more likely to successfully educate your customer and help them move to a buying decision. If you’ve analyzed the total market and have partnered and/or acquired to achieve a more complete set of offerings, you’ll be in a position to meet almost any customer’s needs.

So what are the most common reasons to partner? Here are some that come to mind, in no particular order:

  • Increase: ability to deliver, credibility, revenue, market presence
  • Leverage market clout and intellectual assets of market-leading companies
  • Become certified on a process or technology
  • License a product or technology
  • Remove a competitor
  • Negotiate strategic alliances
  • Prepare to execute acquisitions

While these are fairly specific, here’s a matrix that boils the reasons down to the most common ones:

Partnerships Why

In evaluating potential partners, determine early on which drivers are important to your company, the partner, or both. Then begin compiling a list of specific factors that may be important to the target partner. These may become critically important in later negotiations (we’ll talk about “elegant negotiables” another time).

Next we’ll address the issue of when to partner, i.e. under what circumstances does it make sense).

“Partnerships Don’t Work”

That may not be what you’d expect from someone who builds partnerships for a living, so stick with me as I explain.

We’re all familiar with the dreadful statistics about acquisitions and how the large majority of them fail to deliver the promised results. The reasons are many, and we could easily spend several posts on the subject. I haven’t seen similar stats on partnerships, but they are probably just as bleak.

A funny term popped up in the 90s called “Barney announcements” based on so-called “partnerships” that began and ended with a press release whose message echoed Barney – “I love you, you love me” – but with no real substance.  During the runup to the internet gold rush, this type of announcement was all too common.

Many CEOs feel like they’ve been burned by partnering. They’ve gotten behind a proposed partnership, even passing up other opportunities to put resources into it. After the partnership produces a Barney announcement and ultimately fails to produce – greater revenue, more market visibility, access to customers, or whatever was promised – the CEO forms a bad opinion of partnerships in general.

So why is it that so many partnerships fail? The most common reason is that the people pushing the partnership don’t do the hard work and planning required for success. Either they don’t understand the process, or they are unwilling to invest the time and effort needed to create a productive partnership. Gaining an understanding of all the interests of the parties takes time, and if partnerships are an afterthought, the time just isn’t there to maximize the chances for success.

The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression.

– The late Sir John Harvey-Jones, Former CEO of Imperial Chemical Industries

The Genesis of 20/20 Outlook

While a CEO may have an intuitive feel for how and whom to partner with, the daily rush of keeping the business afloat makes it difficult if not impossible to focus on other areas. If the company is in growth mode, focusing on operations and cost while failing to inject significant resources into marketing and sales stifles growth. If the company’s revenue is flat, new vision for growth supported by a key partnership or perhaps an ecosystem of the right partners is needed.

20/20 Outlook is a process for cultivating a new growth vision for a company (or business unit) in the $5-50M range, then identifying and implementing robust partnerships supporting that vision. In today’s highly interdependent world, creating a breakout strategy must include beneficial relationships that enhance the value of the organization.

Fusing three disciplines – building successful partnerships, making strategic acquisitions, and directing product strategy – into a coherent framework and context for management decisions, 20/20 Outlook advances the exit strategy, all based on years of experience working with a multitude of high tech companies of all sizes.

The 20/20 Outlook process has three goals:

  1. Develop a clear vision that aligns the client company with potential acquirers.
  2. Create productive connections between the client and relevant potential acquirers, acquisitions, and partners.
  3. Collaborate and share responsibility for measurable results, transfer skills to the client, and gradually diminish dependence to the point of disengagement.

Assessing the Value of High Tech Companies

In a recent post, long-time friend and colleague Michael D’Eath speculated about how the acquisition landscape is changing, especially the extent to which roll-ups seem to be an increasingly frequent exit path for startups. Implicit in this process, of course, is how the startup will be evaluated.

A key component of the 20/20 Outlook process is assessing value in the eyes of potential acquirers. A value analysis framework I’ve found helpful consists of a total of 12 different attributes rated as “strong,”“credible,” “limited,” or “none.” In the diagram below, the 12 areas are built in 4 categories from the bottom up, starting with how flexible, patentable, and scalable the company’s technology is (“Credible Technology”).

Value Analysis Framework

Secondly, market credibility is assessed for how established the company is, the strength of the initial customer base, and how capable the company is in successfully delivering a solution (“Credible Market”).

Next, the health of the business is rated in three areas: vertical packaging, repeatable sales model, and repeatable delivery (“Credible Business”).

And finally, we make an analysis of progress in gaining a good reputation with the analyst community, achieving broad scale customer adoption, and market thought leadership is made (“Market Dominance”).

Assessing the current state of each attribute can highlight areas of weakness that need attention and perhaps more resources, as shown in this example.

Value Analysis Framework example

With respect to Credible Technology, this theoretical company has flexible and patentable technology that is still somewhat limited in its scalability. It’s in an emerging market (i.e. established market = limited) that hasn’t quite broken through to mainstream (i.e. still low on the Gartner hype cycle). I won’t drag you through each attribute, but you can clearly differentiate those that are driving up value and that need attention.

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